The evidence on the minimum wage

Swiss voters earlier this month rejected a referendum to raise the country’s minimum wage to roughly $24 an hour. If the referendum had passed, Switzerland would have had the highest minimum wage in the world.

Closer to home, efforts to raise the minimum wage have fared better. Seattle will raise its minimum wage to $15 an hour, though after inflation the standard will be closer to $14 in purchasing power. Efforts to raise the minimum wage aren’t surprising in an era of slow growing wages and high inequality. But how effective is raising the minimum wage?

Before we get to inequality, we have to address the issue of employment growth. Bring up the prospect of raising the minimum wage and invariably the topic will turn to whether it is a “job killer.” The employment effects of raising the minimum wage is one of the most studied topics in labor economics. And after 20 years of careful empirical research, a consensus appears to be emerging—there is no significant effect on employment after moderate increases in the minimum wage.

The minimum wage doesn’t increase inequality by throwing workers off payrolls, but does it actually reduce income inequality? When looking at the minimum wage, the appropriate measure of inequality to use is the ratio of incomes at the 50th percentile and incomes at the 10th percentile. In principle, the minimum wage would reduce inequality by boosting the wages of those near the 10th percentile up closer to those earning the 50th percentile. And the research has found that to be true: the minimum wage does reduce the ratio.

Economists debate the size of that impact, but recently updated work by the Massachusetts Institute of Technology’s David Autor, Alan Manning of the London School of Economics and Christopher Smith of the Board of Governors of the Federal Reserve find that 30 to 50 percent of the rise in low-end inequality was due to the falling minimum wage.

Pushing for an increase in the minimum wage can seem like a stale idea. Advocating for a boost to a policy first created in over 70 years ago doesn’t seem innovative enough. But academic research shows that the policy passes both the test of efficiency (it’s not a significant drag on employment) and equity (it would reduce income inequality).  So we might be best served by sticking with a tried-and-true tool.

May 13, 2014


Nick Bunker


Minimum Wage

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